As financial turmoil and failures spread throughout the volatile industry over the past year, the Securities and Exchange Commission has been scrutinizing cryptocurrency companies wanting to go public.
Bullish Global, Circle Internet Financial, and eToro Group Ltd. are three crypto-focused businesses that have been unable to obtain the SEC approvals necessary for going public. The companies were attempting to list on the stock exchange by merging with special-purpose acquisition companies (SPACs), an alternate route to going public that flourished in 2020 and 2021 before tightened regulatory controls and market volatility put an end to the SPAC boom.
People familiar with the questioning claim that since filing paperwork to list on the Nasdaq Stock Market, another cryptocurrency broker, Galaxy Digital Holdings Ltd. has been subjected to repeated rounds of questions about its operations from SEC staff. Galaxy, which doesn’t have a SPAC structure, declared in March 2021 that it sought to list as a public company in the United States and that it hoped to clear SEC review by the end of the same year.
According to a person familiar with the situation, the SEC wasn’t trying to prevent the companies from going public. However, cryptocurrency companies believe the SEC’s review process moved too quickly, which hurt their efforts, especially following the collapse of a well-known cryptocurrency and the failure of a sizable crypto hedge fund, which affected numerous exchanges and lenders. A bad market in the pricing of digital assets and the insolvency of cryptocurrency exchange FTX may prevent the door from opening.
The vast majority of cryptocurrency companies claim that because their digital assets are not securities, they are exempt from investor protection regulations. Gary Gensler, the chairman of the SEC, disagrees and maintains that many companies in the sector are not compliant.
According to Scott Kimpel, a partner at the legal firm Hunton Andrews Kurth LLP, anyone bringing a cryptocurrency deal to the SEC should be aware there will be a lot of friction.
When businesses desire to enter the public markets, the agency still has sway. Potential securities issuers are questioned by SEC accountants and attorneys about financial disclosures, legal risks, the effect of market disruption, and other topics. The SEC claims that its main purpose in examining disclosures is to ensure that they give investors the legal information.
Potential issuers want the procedure to conclude with authorities finding that the company’s disclosures were “effective,” allowing its shares to be offered for sale to the general public. Bullish, Circle, and eToro have not succeeded in doing so. Regulatory records indicate that the SEC examined their going-public documents for at least a year and didn’t pronounce them effective.
The SEC addressed three letters to Coinbase Global Inc. with inquiries before its IPO in 2021. Contrarily, Bullish responded to more than ten letters over the course of more than a year, according to sources familiar with the messages.
According to a person with knowledge of the situation, Galaxy, which submitted its papers to the SEC in October 2021 for approval to go public in the United States, received one letter from the agency with more than 90 queries. A person familiar with the company said that Galaxy, whose shares on the Toronto Stock Exchange are down around 80% from their peak over the past year, anticipates being able to finally get through the SEC’s barriers.
It has “been irritating that it’s taken as long as it has,” Galaxy Digital Chief Executive Officer Mike Novogratz stated during a conference call in August 2022.
Numerous cryptocurrency businesses that went public after Coinbase encountered an additional difficulty: the collaboration with a SPAC they had imposed a rigid timeline to finish the sale.
A SPAC is a shell corporation that seeks to merge with a private company using the capital it raises from the general public. A SPAC normally has up to two years to locate and close the merger with a partner. The SPAC is required to repay the funds if the deal is unable to pass SEC scrutiny in a timely manner or stalls due to other issues.
In February of last year, Circle postponed the deadline for its merger with SPAC Concord Acquisition Corp. and set a new one for December 2022.
According to those involved with the discussions, Circle worked hard throughout the previous year to resolve the SEC’s concerns with its disclosures, which at one point reached more than 100. It appeared as if the deal could close by the deadline by early November when the company had only a few minor remarks left, the sources claimed.
Later, on November 11, cryptocurrency exchange FTX declared bankruptcy. According to Circle, it has little connection to FTX. The people claimed that after that, the SEC reviewed Circle with more caution.
According to a person familiar with the review, the SEC published a list of 16 questions after FTX’s collapse that it wanted cryptocurrency companies to respond to in public filings, some of which were applicable to the firms under scrutiny.
The SEC published a list of 16 questions after FTX’s collapse that it wanted cryptocurrency companies to respond to in public filings, some of which were applicable to the firms under scrutiny.
The filings were difficult to examine due to a number of reasons, such as company developments that occurred during the review period.
Early in December, Circle and Concord cancelled their agreement. When discussing his interactions with the SEC at the time, Circle Chief Executive Jeremy Allaire said, he thinks that it’s been a comprehensive process. Unfortunately, it took longer than they anticipated.
Although EToro also provides users with access to equities, the SEC’s inquiries to the company, according to a person familiar with the inquiries, centered on eToro’s cryptocurrency business. According to records, the company’s cryptocurrency trading generated 63% of its commission and interest revenue in the first half of 2021. According to the person, the SEC took a particular interest in the accounting approach that eToro gave to the digital assets it stored for users and frequently waited months to react to eToro’s requests.
In a statement, EToro stated that while it anticipates going public in the future, it “will wait for the appropriate time to take this step.